Is a 401k Plan Mandatory in California?

Retirement savings represent a foundational element of financial security for individuals across the United States. Many people depend on their employers to provide pathways for saving towards their post-career years. Recognizing the importance of widespread access to retirement plans, some state governments have introduced initiatives designed to expand opportunities for private sector employees to save for retirement.

Understanding California’s Retirement Savings Mandate

A 401(k) retirement plan is not a mandatory offering for employers in California. However, the state has implemented a retirement savings mandate, requiring eligible employers to either offer their own qualified retirement plan or facilitate access to the state-sponsored CalSavers program. This ensures that employees have a mechanism to save for retirement through payroll deductions if their employer does not otherwise provide a plan.

The mandate applies to employers who have at least one employee and do not already offer a qualified retirement plan. Businesses structured as sole proprietorships or those that are self-employed without additional employees are generally exempt from this requirement. Compliance deadlines for employers are typically staggered based on the number of employees.

This state initiative aims to address the significant portion of the workforce that lacks access to employer-sponsored retirement plans. The mandate focuses on providing access to a retirement savings vehicle, rather than specifically requiring a 401(k) plan. Employers have flexibility in how they meet this obligation, choosing between the state program or establishing their own qualifying retirement plan.

CalSavers Program Details

CalSavers is the state-sponsored retirement savings program that helps California employers comply with the mandate. It operates as an automatic enrollment individual retirement account (auto-IRA) program. Employers do not sponsor the CalSavers plan; instead, they serve as facilitators, connecting their eligible employees with the program.

Employers register with CalSavers and provide basic employee roster information. Once registered, employees are automatically enrolled in the program with a default contribution rate, which is typically set as a percentage of their pay. These contributions are deducted directly from the employee’s payroll and remitted to CalSavers.

Employees have the flexibility to customize their savings within CalSavers. They can opt out of the program entirely, change their contribution rate, or adjust their investment choices. The program offers a limited selection of investment options, generally including a target-date fund as the default and other basic choices. Employers are responsible for processing contributions and providing initial information to employees, but they are not fiduciaries of the plan.

Employer-Sponsored Retirement Plan Alternatives

Employers in California can satisfy the state’s retirement savings mandate by offering their own qualified retirement plan instead of participating in CalSavers. Providing an alternative plan exempts the employer from the CalSavers facilitation requirement. These alternative plans offer employers more control over plan design and can be tailored to their specific business needs and employee demographics.

A 401(k) plan is a common employer-sponsored defined contribution plan that satisfies the mandate. With a 401(k), employees can contribute a portion of their pre-tax or Roth income, and employers may choose to offer matching contributions or profit-sharing contributions. These plans often come with higher administrative complexities and costs compared to CalSavers, but they offer greater flexibility in contribution limits and investment options.

Another option is a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE IRA). This plan is generally suitable for businesses with 100 or fewer employees and requires mandatory employer contributions, either as a match up to a certain percentage of employee compensation or a fixed percentage. Simplified Employee Pension (SEP) IRAs are also an alternative, primarily used by self-employed individuals and small businesses. With a SEP IRA, only the employer can contribute to the plan, and contributions are typically a percentage of each eligible employee’s compensation.

Employer Compliance and Administration

Employers must take specific actions to comply with California’s retirement savings mandate, regardless of whether they choose CalSavers or an alternative plan. A key step involves registering with the CalSavers program, even if an employer offers their own qualified plan. Employers who provide an alternative plan must attest to their exemption through the CalSavers online portal.

Ongoing administration responsibilities vary depending on the chosen path. For employers using CalSavers, duties include managing employee eligibility, facilitating automatic enrollment, processing payroll deductions, and remitting contributions to CalSavers. They must also provide employees with information about the program and process opt-outs or contribution changes as requested by employees. Maintaining accurate records of employee participation and contributions is important.

Employers who offer their own qualified retirement plan are responsible for all aspects of plan administration. This includes ensuring the plan remains compliant with federal regulations, managing contributions, overseeing investments, and fulfilling reporting requirements. Failure to comply with the mandate can result in penalties for employers, which may include fines assessed per employee for each calendar year of non-compliance.